Corporate Transparency Act Reporting

The Corporate Transparency Act (CTA) requires "Reporting Companies" – domestic entities created by the filing of a document with a secretary of state and non-U.S. entities that have registered to do business in the United States – to report identifying information about the individuals who directly or indirectly own or control the company, unless the entity is out of scope or exempt from reporting.

A Reporting Company files a beneficial ownership information (BOI) report electronically with the Financial Crime Enforcement Network (FinCEN). Reporting Companies formed prior to 2024 must furnish information about the Reporting Company, as well as personal identifiable information about the individuals who are beneficial owners of the Reporting Company. An individual is a beneficial owner of a Reporting Company if the individual either 1) owns or controls 25 percent or more of the ownership interests of the Reporting Company or 2) exercises substantial control of the Reporting Company.

The reporting obligation of a Reporting Company is not "one and done" by filing an Initial BOI Report but is ongoing in that a Reporting Company must file an Updated BOI Report if information previously filed changes or a Corrected BOI Report if there were inaccuracies in the filing of an earlier report.

Civil and criminal penalties may be imposed on owners and officers for a willful failure to comply with the Reporting Company obligations.

The Texas Top Cop Shop Case

In a ruling with sweeping breadth, in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al., a federal court in Texas on Dec. 3, 2024, hit the pause button on the government's enforcement of the CTA, issuing a preliminary nationwide injunction and temporarily suspending the reporting obligations of tens of millions of "reporting companies" and their "beneficial owners."

The court's stopgap measure, taken in the face of the "fast-approaching deadline" less than a month away, was intended to "preserve the constitutional status quo" by preventing enforcement of both the CTA, which the court viewed as "likely" unconstitutional, and its reporting deadline and therefore avert the very "substantial" harm that otherwise would be incurred by the plaintiffs and other reporting entities throughout the country. To justify the reach of the order deemed necessary, U.S. District Judge Amos Mazzant viewed the CTA as the constitutionally infirm product of congressional overreach and considered the resulting constitutional violation to be extensive.

At least temporarily, yesterday's preliminary ruling, approaching the Jan. 1, 2025, filing deadline,¹ may well cause head-scratching – and head-spinning – interruptions for companies across the country making last-minute preparations to meet their CTA reporting obligations. As a result of the expansive ruling, an injection of uncertainty has been created on the eve of a critical deadline for companies endeavoring in good faith to timely comply with the required disclosures of this new federal transparency reporting law.

Law enforcement has long supported the disclosures as an important weapon needed to combat financial crimes and protect national security interests – "admirable ends," but nonetheless insufficient justification for the court to salvage the CTA and deflect challenges made under the Commerce and Necessary and Proper Clauses of the Constitution.

Similar to CTA challenges in other districts across the country, the issues in the instant case comprised a panoply of constitutional arguments. After a comprehensive review, Judge Mazzant determined that the CTA could not sustain constitutional muster under the Tenth Amendment (based on arguments regarding the Commerce and Necessary and Proper Clauses, including in the context of an enumerated power). Accordingly, other arguments, including First and Fourth Amendment challenges, were therefore not necessary to address.

By contrast to plaintiffs in other CTA challenges, however, the plaintiffs in Texas Top Cop Shop comprised a varied group of one private individual and five entities, none of which had yet filed a beneficial owner report with FinCEN. In particular, one plaintiff was a tax-exempt organization that brought suit on behalf of its 300,000 members, who were spread across the country. Ultimately, in light of the perceived need to protect such a diffuse and extensive membership, recognition of "approximately 32.6 million existing reporting companies" and the "extent of the violation," the court held that it was appropriate to apply the injunction nationwide.

As a result, the court-ordered suspension of CTA compliance, unless modified, would apply to Reporting Companies not only in Texas, but in every state, even where other federal courts had rejected similar constitutional challenges and upheld enforcement of the CTA.

The interim procedural ruling – a preliminary restraint enjoining the government from enforcing the CTA, the BOI Reporting Rule and its reporting deadlines – does not constitute a definitive determination on the merits. Rather, the preliminary injunction reflects one judge's judicial assessment that the plaintiffs would prevail, having demonstrated a likelihood of success on the merits.

The court also enjoined the government from enforcing the BOI Reporting Rule (the final rule implementing the CTA and providing definitions and guidance for the statute) and the Jan. 1, 2025, compliance deadline under 5 U.S.C. Section 705, which authorizes "the reviewing court" to "issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve the status or rights pending conclusion of the review proceedings" to "the extent necessary to prevent irreparable injury." In the court's view, such an exercise was warranted to "maintain the status quo and protect the parties from irreparable harm."

Anticipated Next Steps by the Government

Under the circumstances and the pressing reporting deadline, it is anticipated that the government will quickly consider its legal options and may seek expedited relief from the preliminary injunction. For example, it may well first move for a stay of the district court's injunctive order, perhaps limited to its nationwide application. It could directly move the U.S. Court of Appeals for the Fifth Circuit, because first seeking a stay from the district court "would be impracticable." The government's motion would be required to set forth the reasons for granting the relief and the facts relied on and provide "sworn statements supporting facts subject to dispute" and "relevant parts of the record." FRAP Rule 8(a)(2). Still, securing a stay could well present a steep challenge unless the government limited the scope and the Fifth Circuit determined that the nationwide application of the preliminary injunction constituted a clear legal error under U.S. Supreme Court or Fifth Circuit precedent.

If, however, the appellate court were to grant a stay, the ruling would effectively reverse the district court's opinion and order, because the injunction would, as a practical matter, be lifted, restoring obligations on Reporting Companies as if the district court had not initially ruled. By contrast, the Fifth Circuit might well take the position that there is no grave or irreparable harm to the government in preserving the status quo pending standard or even expedited appellate review.

The government also could press for an expedited appeal, and it might decide to limit the issue on appeal to the court's nationwide extension of the injunction. However, in light of the government's position in the district court below, arguing (at least according to Judge Mazzant) that relief awarded to the plaintiffs would effectively necessitate a nationwide injunction, such an appeal could be considered less than compelling.

Moreover, given the approaching deadline and the nature of the matter, briefing, argument and a ruling might not be feasible in advance of the Jan. 1, 2025, deadline, even with an expedited appeal. However, on an expedited application, the Fifth Circuit could also direct the parties to quickly address a narrow legal issue, order expedited oral argument and then briskly issue an opinion. Even so, the time would be short, and any substantial delay could prejudice reporting parties who have been waiting in good faith for the court to clear up the injected uncertainty.

Finally, the government might ultimately decide that, under the peculiar and adverse set of circumstances it has been dealt, it would be best for all parties and in the public's best interest to defer the CTA reporting deadline for some period of time – say, six months – subject to a final ruling by the district court, Fifth Circuit or the Supreme Court. Allowing an extended period of time to file would promote more effective compliance with the law and avert unnecessary legal controversies down the road, without significant prejudice to the government.

An announcement from the U.S. Department of Justice, U.S. Department of the Treasury or FinCEN itself could address the issues comprehensively in advance of appellate review.

What Should Non-Exempt Reporting Companies That Have Not Yet Filed Do?

Although the nationwide preliminary injunction relieves the immediate obligation – i.e., right now – to file beneficial ownership reports with FinCEN, nonetheless it would be prudent for non-exempt reporting entities that haven't yet filed to continue to prepare for their report filing by continuing to gather all information and documents that the CTA requires.

A stay of the restraint on the government or reversal from an expedited appeal would reinstate the FinCEN reporting obligations, and an extension cannot be expected or relied on. Being fully prepared with a true, correct and complete FinCEN reporting form and ready to "hit send," if ultimately required, should provide the appropriate protection of a Reporting Company's interests. Until then, it is essential that affected stakeholders remain vigilant – be on the lookout for rulings from the Eastern District of Texas, or the Fifth Circuit or reports thereof from Holland & Knight.

Upcoming Holland & Knight Webinar

Holland & Knight will host a webinar on Dec. 11, 2024, from 11:30 a.m. to 1 p.m. ET, that will focus on recent developments regarding the CTA, including the Texas Top Cop Shop case. Presenters will respond to questions from the audience, raise other questions that have been received and, finally, address issues that have been noted in the CTA practice. Please register online by Dec. 10, 2024.

For More Information

Holland & Knight has established a Corporate Transparency Act Team to address questions about the CTA in general, as well as questions arising from discrete transactional matters. For more information on the CTA's specific impact on you or your organization, please reach out to the CTA team or your Holland & Knight contact.

Notes

¹ The Jan. 1, 2025, reporting deadline applies to non-exempt companies that were formed before 2024. A 90-day filing deadline applies to Reporting Companies formed or registered to conduct business in the U.S. on or after Jan. 1, 2024, and a 30-day deadline applies to Reporting Companies formed or registered in 2025. Further, there is a 30-day deadline for filing Updated Reports, and a deadline of 30 days of becoming aware or having a reason to know of inaccuracies in an earlier report.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.